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Slippage Costs – What Are They And How Do They Occur?

The world’s financial markets can be volatile places, particularly since the rise of electronic trading. In fact, as more investors buy securities through digital means, the chances of slippage have increased.

 

What Is Slippage?

  • When buying, slippage refers to the discrepancy between the amount you expect to pay for a security and the price you actually pay for it. In other words, here slippage denotes whether the security’s price has increased (negative slippage), decreased (positive slippage), or remained the same (no slippage) from the moment you placed your order to the moment your order was effected.
  • When selling, however, slippage is considered positive if the price increases from the moment you put the security up for sale to the moment it sells; and negative if it goes down.

 

Why Does Slippage Happen and How Much Does It Cost?

There are many factors that can increase or reduce your slippage costs, but none are more crucial than timing. Indeed, in today’s fast-paced market, the bid and ask prices of shares and securities can increase or decrease in a matter of seconds

Nevertheless, slippage costs tend to be of just a few cents per share or security, so unlike trade commissions, which you can easily identify in your statements, slippage costs can go unnoticed… 

But it pays to stay on top of them as even an average of 0.05% negative slippage per day over 252 days adds an 11.8% compound cost to your expenses, meaning that your annual profit could all but disappear due to it.

 

Final Word on Slippage Costs

The thing about slippage costs is that they can’t always be avoided… but they can be managed! In fact, through slippage analyses, companies can keep tabs on the slippage costs they’ve incurred and generate statistical evidence on when it’s worth limiting orders.

This is why we invite you to check our next article to discover how conducting a slippage analysis could help you build a stronger portfolio.